THE GIST of Editorial for UPSC Exams : 16 September 2019 (Why India’s growth figures are off the mark (The Hindu))

Why India’s growth figures are off the mark (The Hindu)

Mains Paper 3: Economy
Prelims level: GDP data
Mains level: Economic growth projection data highlights

Context

• The International Monetary Fund (IMF) and financial sector experts continued to predict till October 2008 that the global economy would grow rather than shrink.
• They were way off the mark since the global economy was rapidly slipping into a great recession.

Explaining the markdown

Is India facing a similar situation at present?

• The economic growth rate (quarterly) has been sliding for the last five quarters from 8% to 7% to 6.6% to 5.8% and now to 5%.
• Yet, experts have been talking of a 7% annual rate of growth; every quarter when the rate of growth has been announced, they have argued that things have bottomed out and that the rate would rise henceforth.
• The Economic Survey in July talked of a growth rate of 7% for the current year.
• The Reserve Bank of India (RBI), in its August policy statement, talked of a slowdown to 6.9%, from the 7% predicted in June and 7.2% predicted before that.
• The Asian Development Bank cut its growth forecast from 7.2% to 7% in April 2019.
• Similar is the case with the IMF which cut its forecast for the year from 7.3% to 7%. So, they all talked of a 7% rate of growth when a year earlier it had fallen below that.

How could these agencies be so far off with their estimates?

• The reason is that they are not independent data gathering agencies and depend on official data.
• So, if official data is erroneous, their projections would also turn out to be incorrect. Clearly, the government is interested in projecting a good image and so discounts bad news and ramps up data.
• The question to ask is, if the economy is growing at 5 or 6%, which is historically a good rate of growth, why is investment rate not rising and consumption in the economy stagnant?
• Where is growth dissipating?
• The alternative explanation is that the rate of growth is much less than 5%; that is why investment rate and consumption are stagnating or declining.
• The investment rate has hovered at around 30% for the last several years because the capacity utilisation in the economy has been around 75%.
• Unless this rises, fresh investment will mean even lower capacity utilisation and lower profitability since capital will be underutilised.
• In June, the stock market was at a record high and yet the investment rate did not rise.
• Data from the Monitoring Indian Economy Pvt. Ltd. shows that investment proposals are at a 14-year low.
• In the last year, the RBI has cut interest rates four times and by a total of more than 1%; but the investment rate has not budged.

Impact of announcements

• The government has been in denial but now experts in the Economic Advisory Council to the Prime Minister, in NITI Aayog and the RBI have admitted that there is a slowdown.
• The Ministry of Finance has now gone into hyper drive to make major announcements so soon after the full Budget was presented in July.
• This is an admission of there being a slowdown in the economy.
• Unfortunately, none of these announcements will lead to a recovery since they do not address the source of the problem.
• An hour before the latest data on economy showing slowdown was to be announced, the government announced the big bank merger.

Was this to divert attention from the data to be released?

• The bank mergers will have little impact on the immediate problem of the slowing economy.
• It may only further disturb a major chunk of the banking system in the coming year — and that would not be good for a slowing economy.
• The package for the automobile sector or making banks pass on interest rate cuts to businesses, announced a little earlier will also have little impact since the problem did not originate there
• The announcement of a transfer of ₹1.76 lakh crore from the RBI to the government will only cover the shortfall expected in revenue (which is a result of an unduly high projection of revenue growth).
• It will allow the government to maintain the fiscal deficit target at 3.3%. But, this will not provide the needed stimulus.
• For that the fiscal deficit would have to be allowed to rise or there has to be an increase in expenditures on the basis of mobilisation of additional revenues.
• The fiscal deficit today is at about 9% if the States and the public sector units are taken into account. And how much can the government raise is a political decision that has not yet been taken.

The source

So, where does the problem originate from?

• It is from the unorganised sector which has been in decline since demonetisation.
• It was further hit by the Goods and Services Tax though it is either exempt from it or there is a simplified provision for this sector.
• This sector producing 45% of the output and employing 94% of the workforce, has been in decline, which is pulling down the rate of growth of the economy.

But, why does it not show up in the growth data?

• In simple terms, the reason is that the data for this sector is collected once in five years (called reference years) since the sector has tens of millions of units for which data cannot be collected monthly, quarterly or even annually.
• In between the reference years, the data is only projected on various assumptions.The government document on estimating advance annual estimates and quarterly estimates makes this clear.
• For estimating quarterly growth it uses, “latest estimates of Agricultural Production, Index of Industrial Production (IIP) and performance of key sectors like, Railways, Transport other than Railways, Communication, Banking, Insurance and Government Revenue Expenditure”.
• Except for agriculture, these belong to the organised sector of the economy.
• Even for the annual estimates, basically data for the organised sector are used — like in the case of mining, banking, hotels and restaurants, and transport.
• For construction, steel, glass, etc are used which are also derived from the organised sector production.
• Thus, the implicit assumption is that the organised sector can be a proxy for the unorganised sector.
• But with the economy suffering three shocks in quick succession over the last three years which adversely impacted the unorganised sector, this assumption does not hold true.
• Most of the experts have implicitly accepted the government’s fallacious argument and have thus fallen behind the curve.

Way forward

• In brief, the official data only represents the organised sector.
• To incorporate the unorganised sector, data from alternative sources need to be used.
• The decline in the workforce, the rise in the demand for work under the Mahatma Gandhi National Rural Employment Guarantee Act, etc. suggests that the unorganised sector has declined by at least 10%.
• If this is taken into account, the current rate of growth is much less than 5%.
• If the government does not accept this, then it must reveal the rate of growth of the unorganised sector that it is using in its estimates and which is not based on using the organised sector as a proxy.

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Prelims Questions:

Q.1) Consider the following statements regarding contempt of court:
1. Section 10 of The Contempt of Courts Act of 1971 defines the power of the High Court to punish contempt of its subordinate courts.
2. The limitation period of actions of contempt is six months from the date on which the contempt is alleged to have been committed.

Which of the above statements is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A
Mains Questions:
Q.1) The over-reliance on the organised sector for official GDP data is causing a gross miscalculation. Explain it. How could these agencies be so far off with their estimates?